Make your money work for you!

Month: January 2015

I visited Moneyzen‘s office back in August before I started investing with them to see what their strategy was. About a week ago, I visited again to see how they were doing, and to get some comments about how things are going for them.

Overview of last year

Moneyzen finished last year with a bit more than 400 000€ given out in loans. Overall, that was obviously less than they had hoped for, but for a strategy that’s supposed to be conservative in terms of picking high quality clients, that was maybe expected.

Another aspect that was different from what was expected was the way the loan portfolio turned out – the loans have a longer duration and a bigger sum than they had originally predicted. I can see that from my own portfolio as well, the average loan length is 40 months, making it a pretty non-liquid investment, especially since there is no secondary market yet.

In terms of investors, they are still financing quite a lot of the loans themselves, which shows that they believe in the model. The number of investors is growing, but slowly – that’s to be expected since the portal is still quite new and people are always somewhat conservative when it comes to investing their money.

Current status

There are several core ideas about Moneyzen that I still like:

1. Owners participate heavily in loans, which means they have a vested interest in things working well.

2. Recovery is done in-house, both cutting costs and allowing for more flexibility.

3. They have not lowered their standards for loan clients, even though there is enough investor money available.

4. They invest a lot of time into communication with investors, (which is something other sites might want to learn from.)

What the future may bring

It’s difficult to predict what might happen to a social lending company since the market can be quite volatile. The CEO himself stated that at minimum they want to build up their portfolio to 1M€, which would mean (almost) hitting profitability, which isn’t bad for being around for only 2 years by that point.

It’s also obvious that Estonia as a market is somewhat over saturated and the new regulations that are coming live may impact the market in different ways. Whichever way they want to play it, expanding into another country is necessary and apparently planned as well (and hopefully they’ve learned from all the mistakes that Bondora made!).

Hopefully the developments of the site will pick up as well, since they’ve been currently not happening due to needing a developer. So, if you know Ruby on Rails and have a passion for social lending, there’s a position available for you!

Social lending is an easy way to invest, but sooner or later most investors come to the point where the idea of starting to invest under a company becomes interesting. (Mostly after you’ve paid your first bit of income tax and seen how much that is!)

As my portfolio has gotten bigger, I’ve started to consider investing as a company as well, since the amount of money you save on taxes is impressive.

Overall there are two main benefits and two main downsides and upsides of investing as a company:

Benefits:

– You can postpone paying taxes until you want to take out the money from your business in dividends. (Essentially pre-tax money gets to grow in peace.)

– You can charge off defaulted loans that are showing no recovery, thus lessening your tax burden even further.

Downsides:

– The way Bondora and others handle data reporting right now doesn’t work too well in terms of the info you need for accounting.

– There is no standard for how to report Bondora investments, finding a bookkeeper might be difficult and learning the reporting yourself might be time consuming.

Real numbers based on my portfolio

The numbers speak for themselves though, and Krista, who runs an accounting focused blog in Estonian calculated sample returns based off my portfolio, so that’s food for thought. Go look at the numbers to see the difference. (Spoiler: I’d have increased my earnings by more than 40% if I’d invested pre-tax earnings as a company.)

The new Bondora portfolio manager which was launched just a few weeks ago, has managed to cause quite a bit of panic among investors due to the lack of information on the inner logic of the manager. I contacted Pärtel, the CEO of Bondora, to get some clarification on whether I understood the portfolio manager correctly and this is a short overview of what you should take into account when setting up your manager.

Portfolio manager launch

I cannot leave this unmentioned, the launch was one again, expectedly troublesome.

1. The launch of the manager was late by a week. (None of the investors were surprised. This is not a good thing, once someone loses the capacity to be disappointed in you, it shows that they have stopped caring, not something you want from your clients.)

2. The manager was buggy at launch. (The numbers didn’t add up to 100%, the promised visuals weren’t there, and the manager did strange things for some people.)

3. The manager was not launched with enough information. (You could see this by the discussion that erupted in forums and on Facebook, people trying to figure out what to do with the new manager and what the new settings meant.)

Overall, I applaud the attempt at simplicity, but the launch could have gone much smoother, and a lot more communication is needed to make the manager appeal to more people. Several investors have turned theirs off since they don’t trust the manager to make decisions for them, since they won’t know how the manager makes the decisions.

The logic behind the portfolio manager

I’ll go over some of the basic ideas on how the manager works and add some theoretical/sample situations for you to consider.

1. The portfolio manager does NOT take into account previous investments

Pärtel confirmed this as well, stating that the manager’s main goal is to work for future investments and for this reason past portfolio setup is not taken into account. You can still see your portfolio division though, to make decisions based on that.

This means that if you, for example, like me, have 20% of your loans in HR loans, then the ideal way to reduce their part in your portfolio is to not have any more loans added into this category for a while, or keep the percentage assigned low enough that it wouldn’t keep growing (sub 5% probably).

2. The portfolio manager STOPS after the assigned %/number is filled

This was confirmed as well by Pärtel. If you assign your portfolio size to 1000€, then after it has invested that amount the manager stops. This also works, if you for example set 15% of investments into C group then after it has filled 150€ in loans, that credit group stops getting any loans.

The biggest point here being, right now it’s impossible to see how much of any segment has been filled up. Pärtel said that in the next few weeks there will be indicators to show you how much of the manager’s original settings have been filled up and how much have been filled up by segment. This should give you a chance to estimate how successful your managers are.

3. Editing the manager means a hard RESET

If you have set up your portfolio to invest 15% into C loans for example but feel like you want to edit it to 20%, then this means a reset for the manager, and essentially it will start counting the loans again from zero. This means any edits cause previous portfolio manager progress to disappear.

Pärtel said that there would be better indicators here for people to realise that editing the manager essentially causes a reset of the goals. This means that in the long run, the manager should be something you set to run and forget, since otherwise it keeps trying to start over.

4. The new manager focuses on getting money out ASAP

With the old system, since you couldn’t get loans to go out particularly quickly, you could have money sitting around on your account for days without moving. Since the new manager sets to fill out any goal you’ve given it, that means money moves much quicker as long as any loan is available that sets your criteria.

For example, if you set your portfolio to invest 90% into A and 10% into B rating, then the manager invests into either group, no matter how much of the goal has been fulfilled, meaning it could invest 90% into A as long as those loans are available and not wait around for B or keep some amount reserved for it. When 90% A is filled, then it just sits and waits for B group loans.

5. The queue system still works, kind of

With the old system there was a strict queue for getting loans. Everyone was in a long long line for all types of loans and that set the pace for your portfolio. I asked this from Pärtel as well, whether the queue system still works and the answer was somewhat vague. Essentially he said, that the system tries to guarantee investors equal chances at different types of loans, I’m not sure how to take that answer.

In terms of fishing for best loans though, this means that while setting your manager to get AA group loans means that you only get AA group loans, doesn’t mean that you get more AA group loans than other investors who have included that group in their manager.

Overall use of the new manager

I’m looking forward to both more visuals, more overall information, more experience from other investors and the hinted indicators that help you keep track of what your portfolio is doing. I’ve personally set a quite conservative selection into my portfolio as you can see from the projected lower returns and I liberally hand-pick loans to add into my portfolio. For this month about half the loans I’ve picked have probably been manually, I mostly add HR loans manually. The new manager takes some practice, but once the fundamental logic becomes more clear, I hope for overall efficient use.

What you can do with it:

– Set and forget, which is ideal of super passive investors

– Force a bigger amount of money into a credit group when you want

– Get more investments our quicker than before

What you cannot do with it:

– No fine tuning your portfolio based on x criteria

– Be able to keep some money in reserve for “good” loans as you could before

My MoneyZen portfolio is slowly starting to grow, so a short overview about how it’s doing.

I’ve currently invested 200 euros (50€/month) into Moneyzen and on the last days of December the first additional loan went out, so I now own 21 loans.

So, it took 4 months of growth to get an additional 10 euros in returned principal + interest to fund another loan. At this pace another additional loan made up of returned principal and interest will go out in about 3,5 months or so. The biggest problem I have with my portfolio right now is that there is no easy way to see your cash flow. To see how much money you made per month you essentially have to do the calculations by hand. (Look at the image above – there is no way to tell how much of the theoretical calculated interest is actually delayed). They promised a better system (2 months ago?) but no such development yet. I really hope that they mange to get a better overview going before they grow too big and then start suffering from the Bondora syndrome that they don’t have time to fix the basics.As expected, highest credit group loans are very rare, out of my 21 loans only one is from the 901+ credit group. So far most loans are paying fine, but out of the 21 loans I have, 5 are delayed by at least a month and one is delayed by 2 months. The longest delayed loan almost went bankrupt just before Christmas but they made some last minute payments so I haven’t seen the collections process in any way yet. They have a nice touch with sending notices though, the text reads something like “Please return the money you borrowed from other people.”

Future hopes

Overall, I’m happy with them. Giving out loans seems to go well enough, so at my pace I don’t see any issues. The biggest problem I see is that the development doesn’t seem to be going as fast as they’d like? I wonder what the reasons are for that. As my portfolio gets bigger though, I’d expect a much better overview of what’s happening with the money.

It is a lot easier than investing into Bondora though, once you set your portfolio to invest you don’t really have to check it too often. If they can keep this model working in a satisfactory way it’d be happy to increase my portfolio. The lower returns are OK if they manage to make it a more passive investment than Bondora is currently.

I’m overall a bit concerned about recovery and delayed payments though. Quite often the loans I have are delayed and I think they might have been somewhat optimistic with their promised default rate, but I guess I’ll see that once my first loans default, which will likely happen at some point. (Since with average interests well below 20% you can’t afford many defaults.) Main concern and hope for the next months, though, is a hope for better visuals and more data.